In a move that will bring down interest rates in the system, the government has reduced the return on small savings schemes by 10 basis points (100bps equals one percentage point). These include schemes such as public provident fund (PPF), Kisan Vikas Patra and the senior citizens saving scheme.
The interest rate on the PPF scheme is now 7.8%, Kisan Vikas Patra 7.5% and 8.3% on the 5-year senior citizen savings scheme. The rates, notified by the finance ministry on Friday, will be effective for the second quarter ending September 30. The rate revision does not impact the mandatory employee provident fund (EPF) scheme which has an interest rate of 8.65% for FY17 for the four crore-plus PF accounts in the organised sector.
The reduction will enable banks to bring down interest rates on longer term deposits. “Since the benchmark marginal cost of lending rate is determined by the cost of funds for a bank, any meaningful reduction in deposit rates will result in a drop in the cost of funds and will help bring down the lending rate,” said a senior official with a public sector bank.
State Bank of India (SBI) currently offers 6.25% on term deposits of up to five years, which is on a par with the yield on 10-year bonds.
From 2016, the interest rates on small savings are reset every quarter. This revision is in line with the movement in general interest rates. The return on the 10-year government bonds has dropped from 6.68% in end-March 2017 to 6.51% in end-June.